The case of Tongaat Hulett: When sweet dreams turn sour


As a kid, I was fascinated by Modjadji, the Rain Queen. She could call the clouds and make it rain. I also loved that she is part of a matrilineal monarchy so her eldest daughter is the heir and males are not entitled to the throne.

Now older and wiser, I know predicting rain may be easy, but profiting from it less so.

In the middle of last year I started talking about the one certainty of a drought – which is that the rains would eventually return. Putting my investment hat on, I looked for shares that would benefit.

I got the rain part right as the rains did return in most areas. But so far, the stock I’d bought to benefit from the rains, Tongaat Hulett*, has not been moving higher. I want to delve into not only why it’s not responding, but more importantly, what to do when an investment theory does not play out.

The key point with any investment theory is to accept that it is just a theory with a lot of moving parts. We can try and predict how many of these parts will move, and even if we get it mostly right, there are still other bits that can derail the theory.

Importantly we’ll also get some of our theory wrong; we’re never 100% right. This is one of the core tenets of investing: you can’t always be right, so you have to know when you’re wrong and have an exit plan.

As I have written before, there are always three key aspects that attract me to an investment and I use these as my starting point when asking the hard question: “Was I simply wrong?” Now, I could be wrong in my assumption or I could be wrong in how the market would respond or even how the business would benefit, so there is much room for error.

Why didn’t the Tongaat Hulett theory pan out?

In the case of Tongaat, I picked it because of the sugar exposure that had suffered due to the drought. The first of my three key points was: returning rains and hence increased sugar production.

Second, I predicted that starch would continue modest single-digit growth and, third, that property would be lumpy, but ultimately grow at low double-digit rates.

The first two have happened, yet the share trades at around R110, a few rand lower than in mid-2016. Now, sure, investors also received 360c in dividends, so we’re more or less flat, but we wanted profits.

Digging deeper, two issues may be dampening the stock’s performance. First, sugar production is improving, but at a slower rate than I had expected with full ramp-up only coming in during the 2018 financial year. The sugar price has also not played ball. This was one of the risks I identified, but wasn’t confident enough to try and predict.

That said, the minister of finance has reinstated the sugar tax, which will put the price of the imported product on a par with locally produced sugar, and that should help.

The second issue was Tongaat’s property section, which has had a worse time than expected. It has always been lumpy, but the move upwards has not as yet occurred and may not. If it doesn’t, the whole investment theory starts looking weak as property will be taking from the increasing sugar profits.

For now I continue to hold Tongaat, but will be checking how the property division of the business performed in the next set of results. But a very last thought is that, while I liked the starch and property parts of Tongaat as a hedge of sorts, they have disappointed, but even a pure agriculture stock such as Crookes hasn’t fared any better.

Maybe the lesson is to leave the rain to the Rain Queen.

This article originally appeared in the 19 October edition of finweek. Buy and download the magazine here.

*The writer owns shares in Tongaat Hulett.
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